Microsoft Word - Writing Guidelines for Panera Bread Case FIN 4596 Fall 2020 Guidelines for Executive Summary in Panera Bread Case The Executive Summary submission should begin with a cover page with...

Why Panera Bread need external financing?


Microsoft Word - Writing Guidelines for Panera Bread Case FIN 4596 Fall 2020 Guidelines for Executive Summary in Panera Bread Case The Executive Summary submission should begin with a cover page with your name, the title (that specifies the type of document, the name of the company, and the financial issue explores), and then continue with the main body TWO-page with the key issue(s) at hand and your recommended solution to that problem(s). Remember to focus and to be as clear and concise as possible in describing the problem, the results, and the solution; the goal is to help senior managers make a more informed decision moving forward. The Executive Summary (main body) should be TWO-page long document (standard margin, 12-point font, double spacing), internally consistent, and free of spelling, sentence structure, or factual errors. The analysis should be written in paragraphs, not numbered bullets responding to some or all discussion questions. Please insert page numbers and use subheadings as needed for clarity, flow and organization. Please keep in mind that you are supposed to report to senior executive(s) within the firm who knows the history of the firm but may not be very familiar with finance. Do not review background known to them and Write clearly in a non-technical way so that any bright firm executive will understand the problem quickly and your recommended response to that problem. You may add up to two pages of more detailed analysis of the points raised in your executive summary. Remember those additional analyses are there for reference only, if the reader would like to confirm or further explore your main points in the summary. In the end, you will submit TWO files to the Assignment: the Word file containing the Executive Summary (and the additional analysis if any), and the Excel file of your data analysis. Be sure to retain the original Excel formatting so that instructor may click on each cell to determine its derivation. · The assignment includes completing the excel file and a 2-page executive summary and 1-2 page of references. · Executive Summary (2 pages) must include: · Describe Panera’s current financial health · Use numbers and ratios to support · Why Panera needs external financing? · How much external financing is needed? · Recommendations Panera Bread Company UV1066 Rev. Dec. 4, 2019 Panera Bread Company As the end of 2007 drew near, Panera Bread Company (Panera) was facing a brand-new challenge. Until recently, strong margins had allowed Panera to finance its rapid growth largely through retained earnings and very minor equity infusions resulting from compensation programs. The company used no permanent debt financing and, in fact, had allowed a $10 million credit facility to expire. But now Panera was facing a decline in margins that would limit its ability to rely on internal funds. With growth expected to continue and a $75 million stock repurchase under consideration, the company realized it would almost surely need capital from external markets—in both the short run and the long run. History and Business Model Panera had its origins in another successful bread venture, Au Bon Pain Co., which was founded in 1981. The success of Au Bon Pain in the 1980s gave rise to the 1993 purchase of Saint Louis Bread Company, a small bakery-café company located in St. Louis. By the end of 1999, the Saint Louis Bread Company concept was being expanded under the Panera Bread name, Au Bon Pain had sold off all its units except Panera Bread, and Au Bon Pain itself had adopted the Panera name. Panera’s goal was to create a dining experience centered on fresh-baked bread in an environment where people “slowed down to enjoy real food.”1 Its emphasis on wholesome foods and a welcoming environment placed the company in stark contrast to the fast-food experience that dominated the multiunit restaurant business. An essential element was a commitment to high-quality bread. Panera breads were baked fresh every day, at every location. The bread was featured in virtually all the store offerings, including such selections as made-to-order sandwiches and soup served in a bread bowl. Ensuring high-quality bread required the best ingredients, specialized equipment, and careful training. For example, Panera baked its breads on heated stone slabs in European-style ovens. Customers appreciated the results—Panera consistently earned recognition for the quality of its offerings, often attaining the top position in customer-satisfaction surveys. The essential business model, therefore, was to provide a meal and dining environment of sufficiently high quality that customers would gladly pay for that quality—at a price that would also make the company financially successful. The success of this business model was readily apparent. Starting in 1993 with just 20 stores, the firm finished 2006 with more than 1,000 locations, across 38 states, operating under the Panera Bread and Saint Louis Bread Co. names.2 During 2006 alone, the company increased its number of outlets by 17%, and attained 1 Panera Bread Company annual report, 2006. 2 “The Panera Bread Press Kit,” Panera Bread, http://www.panerabread.com/about/press/kit/ (accessed Oct. 7, 2008). This case was prepared by Marc Lipson, Associate Professor of Business Administration. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2008 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an email to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Our goal is to publish materials of the highest quality, so please submit any errata to [email protected]. For the exclusive use of K. Giang, 2020. This document is authorized for use only by Kelly Giang in FINA 4596 Fall 2020 Section 004 taught by Tilan Tang, Temple University from Aug 2020 to Dec 2020. mailto:[email protected] mailto:[email protected] http://www.panerabread.com/about/press/kit Page 2 UV1066 more than 4% same-store sales growth. For the three years ending in 2006, total revenues grew an average of 32% a year, with operating profit to sales averaging 12%.3 Recent Challenges A key measure of success in the restaurant business was transaction growth—the increase in same-store sales ignoring the effect of price increases. Transaction growth at the start of 2007, continuing a trend from the very end of 2006, was lower than anticipated. In addition, margins for 2006, while strong, were down slightly from the previous two years (financial statements for 2003 to 2006 are presented in Exhibits 1 and 2, with a forecast of operating results for 2007 presented in Exhibit 3), and were expected to be even lower in 2007. These problems were not unique to Panera. Commodity costs, particularly of wheat, had risen, and cost uncertainty was a concern for the entire restaurant industry.4 To drive transaction growth for the future, the company might need to back off on price increases even in the face of rising costs. In other words, to sustain the firm’s growth, Panera might have to operate at tighter margins. Furthermore, as a result of tightening margins, uncertain costs, and a softening in transaction growth in 2007, Panera’s stock price had dropped a precipitous 10% on the announcement of third-quarter results, and was down almost 40% over the past year (Exhibit 4 presents stock price data from 2006–07). In response, the firm was considering a $75 million stock repurchase. As JPMorgan Chase & Co. analyst Steven Rees observed, the repurchase would signal management’s position on the “long-term potential of the business as well as many company-specific near-term initiatives to drive sales and margin improvements.”5 Financing In the past, Panera had financed growth through retained earnings and through the modest increases in equity capital that resulted from the exercise of stock options and employee stock ownership plans. In effect, there had been little reliance on external capital.6 This reluctance to assume debt was typical of some, but not all, competitors (Exhibit 5 presents capital structure information for a variety of dining companies). As 2007 drew to a close, however, Panera was clearly stuck between a rock and a hard place. Raising prices to improve margins would stymie company growth, and would likely precipitate a further decline in the firm’s stock price. Accepting tighter margins would allow growth, but would limit the ability of internally generated funds to finance that growth. Adding to this conflict was the need to raise funds to make the stock repurchase. In the end, it was clear that Panera would have to consider, for the first time, accessing external capital markets. The real questions were how much, what kind, and when. 3 Panera Bread Company annual report, 2006. 4 Melanie Lindner, “Panera: This Bread Is Not Rising,” Forbes, October 24, 2007, https://www.forbes.com/2007/10/24/panera-bread-restaurant- markets-equity-cx_ml_1024markets20.html#44a7d3bef91b (accessed Oct. 6, 2008). 5 Melanie Lindner, “Panera Bread Leavening,” Forbes, November 28, 2007, https://www.forbes.com/2007/11/28/panera-bread-buybacks-markets- equity-cx_ml_1128markets35.html#7f38f2994499 (accessed Oct. 31, 2019).. 6 The company did have small, occasional borrowings. These were not outstanding at year-end, and were the reason the company showed small amounts of interest expense